On July 2, 20x2, you decided to start up a new business - Heavenly Books Inc., an off-campus bookstore where students can purchase textbooks and supplies at reduced prices.
The following are summary transactions for the period July 2, 20x2 to October 31, 20x2, the company's year end.
1. You and several other shareholders invested $20,000 in return for shares in the company.
2. A suitable location is found and rent is $1,000 per month. The first and last month's rent are due upon signing of the lease on July 2, 20x2. The lease agreement is for one year. In addition to the monthly rent, an annual charge equal to 1% of sales is due at the end of the year (i.e. on June 30, 20x3).
3. Furniture and fixtures are purchased at a cost of $15,000. These are purchased for cash.
4. A bank loan in the amount of $20,000 was obtained on August 1, 20x2. Interest payments are due on the 1st of each month. The annual interest rate is 9%. The loan agreement calls for repayments of $4,000 every 4 months with the first payment due November 1, 20x2.
5. Books and supplies of $50,000 were purchased on account.
6. An insurance policy was purchased for $1,200 cash. The policy takes effect on July 2, 20x2 and expires on June 30, 20x3.
7. Sales for the period ended October 31, 20x2 were:
Cash sales - $190,000
Sales on account - $6,000
8. A total of $4,000 of the sales made on account was collected.
9. An additional $120,000 of inventory was purchased on account.
10. Additional cash disbursements for the year were as follows:
Wages and salaries ?$36,000
Rent ? 3,000
Advertising ? 2,000
Miscellaneous expenses ? 1,500
Dividends to shareholders ? 10,000
Interest on bank loan ? 300
Payments on account re: purchases of inventory ?130,000
TOTAL?$182,800
The following adjustments at year end must be made:
11. The furniture and fixtures are expected to last a total of 10 years with no residual value. The straight line method is to be used.
12. The adjustment for insurance expense.
13. The interest payable on the bank loan. Credit Accrued Liabilities.
14. Books costing $15,000 were returned to the publishers.
15. An inventory count shows that a total of $25,000 of inventory is on hand.
16. Invoices received but not yet paid amount to $700 for miscellaneous expenses.
Credit Accrued Liabilities.
17. Employees are owed a total of $600. Credit Accrued Liabilities.
18. Adjustment for rent payable.
19. The expected income tax rate is 30%. Credit Accrued Liabilities.
Required:
a. Enter all the above transactions in T-Accounts and show the appropriate journal entries.